Alumina stake sale too early, analysts fear

Alumina’s $452 million placement to China’s Citic Resources, which sent its shares soaring, may have been premature given a nascent recovery in alumina prices, analysts say.

This morning, Alumina unveiled the placement to Citic of 13 per cent of the company, already approved by federal Treasurer Wayne Swan and China’s powerful National Development and Reform Commission.

The placement was at $1.23 per share, an 11 per cent premium to Alumina’s prevailing stock price over the last month. Proceeds will go to reducing debt, which will fall by almost two-thirds from $US681 million to $US216 million.

Alumina shares jumped as much as 20.5 cents, or 17 per cent, to $1.405 this morning but had fallen back to $1.32 by late afternoon.

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Alumina reported a loss of $US14.6 million in the half-year to June 30, sunk to a 10-year low of 64c last July, in line with a slump in the price of alumina to $US308 a tonne.

Alumina prices have since recovered to more than $US351 a tonne and Alumina’s shares have climbed accordingly.

In a note to clients Deutsche Bank’s head of mining research Paul Young said the deal was ‘‘mildly value dilutive’’, reducing Deutsche’s valuation of the company by about 3 cents per share to $1.39, but would add to earnings, cutting Alumina’s interest expense by $US30 million a year.

While Deutsche welcomed the deal and reiterated its ‘‘buy’’ recommendation on Alumina, Mr Young said alumina fundamentals were improving ‘‘rapidly’’ and noted: ‘‘existing shareholders were not given the opportunity to participate in the deal’’.

‘‘Furthermore, spot alumina prices are now only just starting to rise and debt covenants had been cleared out to 2015, so the placement may be slightly premature’’.

Mr Young said both bauxite and alumina prices were likely to rise further as Chinese demand improved.

PhillipsCapital analyst Lawrence Grech said Citic’s deal with Alumina ‘‘just goes to show you how much money they really needed. Alumina was in need of capital and they’ve got it. That’s a positive. Does it change the underlying (profit) margins of its business? The answer is, not in the short term.’’

Alumina chief executive John Bevan said Citic’s investment ‘‘demonstrates their confidence in the alumina industry’’.

Citic, which already holds 22.5 per cent of the Portland aluminium smelter owned by the AWAC joint venture between Alumina (40 per cent) and giant Alcoa (60 per cent), would not comment today.